This is one of the genuinely effective special remedies in Indian commercial law, and it is heavily under-used.
The statutory scheme
Under the Micro, Small and Medium Enterprises Development Act, 2006:
- Section 15: a buyer must pay a micro or small supplier on the agreed date, and where there is no agreement, within 15 days. In no case may the agreed period exceed 45 days from acceptance or deemed acceptance.
- Section 16: on default, the buyer is liable to pay compound interest, compounded monthly, at three times the bank rate notified by the Reserve Bank of India. This is not discretionary and it accrues automatically.
- Section 18: the supplier may refer the dispute to the Micro and Small Enterprises Facilitation Council, which first attempts conciliation and then, if that fails, conducts or refers the matter to arbitration, treating it as an arbitration under the Arbitration and Conciliation Act, 1996.
How to use it
- Confirm you hold a valid Udyam registration as a micro or small enterprise. Note that the special payment protection covers micro and small suppliers; a medium enterprise supplier does not get the same benefit.
- File the reference online on the MSME Samadhaan portal with the invoices, purchase orders, proof of delivery or acceptance, and the interest computation.
- Attend conciliation. A large share of these settle at this stage, because the interest liability is unattractive and the buyer's auditors must disclose MSME dues.
- If conciliation fails, the matter proceeds to arbitration and results in an award.
Why buyers settle
Two pressure points. First, Section 23 disallows the interest as a deduction for income tax purposes, so it is a genuinely expensive liability. Second, companies must disclose amounts outstanding to MSME suppliers in their financial statements and file periodic returns on MSME dues. Being named as a defaulter is a real commercial cost.
Two pressure points. First, Section 23 disallows the interest as a deduction for income tax purposes, so it is a genuinely expensive liability. Second, companies must disclose amounts outstanding to MSME suppliers in their financial statements and file periodic returns on MSME dues. Being named as a defaulter is a real commercial cost.
The condition on appeal
An application to set aside an award made under this scheme requires the appellant to deposit 75 percent of the amount awarded, which strongly discourages appeals filed only to delay.
If you are not MSME-registered, the ordinary routes remain: a legal notice, a summary suit under Order 37 CPC on the invoices, or arbitration if your contract provides for it.